Alt-A Mortgages: Don't panic

So says the FT:

The idea of just handing the keys back and walking away from a house worth less than the loan made against it tends to catch the imagination. Hence fears that the expiry of initial fixed rates on Alt-A loans could result in another wave of foreclosures, just as the pain in the sub-prime segment appears to be peaking.

Yet there are reasons for cautious optimism. Alt-A borrowers have better credit records than sub-prime debtors, and the pool of Alt-A mortgage backed securities is smaller - about $600bn for loans made between 2005 and 2007, compared with about $1,000bn for sub-prime. Home owners will not necessarily default just because plummeting home prices have left them with negative equity. Research by the Boston Federal Reserve examining house price falls in the early 1990s found that while negative equity was a necessary condition of foreclosures, borrowers also had to run into cashflow difficulties before losing their homes.

Will they? Many of the Alt-A mortgages were made with interest rates typically set at between 5.5-7.5 per cent for those with a fixed period of 12 months or more. These then "reset" to adjustable rates. With wholesale interest rates currently low, those resetting will see little shift in their interest cost. Instead, it is the end of "interest-only" periods that will be most painful. New research by CreditSights out this week, however, suggests principal re-payments kick in within the first three years in only 4 per cent of 2005-origin Alt-A mortgages and in only 1 per cent of those of 2006 vintage. That is a significant ripple, but not a wave.

After every bubble, there's generally a sort of an anti-bubble--when analysts start looking for reasons that this is, like, the worst crisis ever.  The worries about Alt-A mortgages seem to me to be largely part of this fever.  "Everything in the future will be exactly like everything that just happened" is what got us into this mess in the first place . . .

Presented by

Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

The Man Who Owns 40,000 Video Games

A short documentary about an Austrian gamer with an uncommon obsession

Join the Discussion

After you comment, click Post. If you’re not already logged in you will be asked to log in or register.

blog comments powered by Disqus

Video

The 86-Year-Old Farmer Who Won't Quit

A filmmaker returns to his hometown to profile the patriarch of a family farm

Video

Riding Unicycles in a Cave

"If you fall down and break your leg, there's no way out."

Video

Carrot: A Pitch-Perfect Satire of Tech

"It's not just a vegetable. It's what a vegetable should be."

Video

An Ingenious 360-Degree Time-Lapse

Watch the world become a cartoonishly small playground

Video

The Benefits of Living Alone on a Mountain

"You really have to love solitary time by yourself."

More in Business

Just In